David McWilliams has lead many of the debates in Ireland in the area of our banking policy over the past three years, and did indeed send out warning signals as early as 2004 that our property market was a bubble. He deserves credit for that, being one of the first (if not the first) to say that Ireland had an over heated property bubble and could be facing a crisis, although others such as The Economist magazine were also calling it pretty early on too.
But then he did get it completely wrong too. In September 2008 at the time when the ‘credit crunch’ was raging across the world, the debate about the Irish banks was whether they would survive a liquidity crisis being very much exposed to property lending and getting their borrowing from foreign banks. Ireland’s banks were teetering on the brink. This is when McWilliams led the debate by proposing that the Irish state quickly step into the breech and guarantee all the liabilities of the banks. Here’s what he said on 28 September 2008 the day before the Irish Government did indeed guarantee all the banks’ liabilities:
The only option is to guarantee 100 per cent of all depositors/creditors in the Irish banking system. This guarantee does not extend to shareholders who will have to live with the losses they have suffered. However, it applies to everyone else.
“State Guarantees Can Avert Depression” – 28 September 2008
The week previously he had proposed a couple of options that the Irish Government could choose from, weighing up the pros and cons. Whether Ireland should adopt a Lehmans-style policy by just letting the banks go or should the State go all in to rescue them. He said that whatever the option the government chooses, it must act:
Let’s be clear: it would be unforgivable if a situation of illiquidity were to prompt insolvency due to lack of decisive action from the state.
“State Must Act As A Safeguard” – 21 September 2008
We all now know that not only were the Irish banks facing a liquidity issue, but a solvency one too. The banks couldn’t secure enough borrowing to stay open and then didn’t have the assets to support its borrowings as much of its lending was into an overpriced and highly leveraged property market. David McWilliams can be forgiven for not realising the scale of insolvency the Irish banks faced. Practically all the Irish banks were insolvent. At the time the government put in place the guarantee it understood to the best of its knowledge that solvency wasn’t so much an issue, the guarantee was there to ensure that the banks could keep refreshing its borrowing to keep the system going. The prospect of billions of losses lumped onto the national debt didn’t really occur to the government at the time to be a serious risk. It was a risk alright, but a risk they thought had a low prospect of becoming a serious issue for the very solvency of the country. David McWilliams believed this also from his articles written at the time.
However, this is where I think McWilliams loses credibility and really crosses the line from economist to political journalist. With hindsight to his advantage, and not to Brian Lenihan’s, McWilliams would furiously turn on the government’s banking policy – and for what? His articles became politically driven and very journalistic in nature. Forgetting what he had written himself, he proposed populist solutions such as a 1 year non-payment of interest by everyone, mortgage debt forgiveness and even a referendum on Ireland’s bank bailout (for example see this more recent article). This was a man riding the crest of the anti-FF wave and milking from it popularity and credibility amongst the ordinary man. Polls carried out by the Sunday Independent and other papers placed him as the people’s favourite to be Ireland’s Minister for Finance.
How effective would he have been as Minister for Finance? About as effective as Brian Lenihan. He proposed the same ideas that the government adopted in its policies. Would he have been so popular had he not the benefit of hindsight?